Inflation shows sign of cooling, but experts pour cold water on hope of interest rate cuts

(TND) — New government reports point to a cooler economy and possibly cooler inflation.

But experts say it’s not time yet for Americans squeezed by high prices and high borrowing costs to exhale.

Stagnating progress on inflation has wiped multiple interest rate cuts off the board for this year.

WalletHub Founder and CEO Odysseas Papadimitriou said Americans shouldn’t hold onto “false hope that rate cuts are coming.”

“Rate cuts are not coming anytime soon,” he said Friday. “Buckle down. Inflation is here. Rates are going to be high. Cut spending. Pay down debt.”

Papadimitriou said Federal Reserve policymakers were premature to acknowledge the possibility of rate cuts back in December.

Colorado State University economist Stephan Weiler said his bet is still on one rate cut, but not until November.

That would likely be 25 basis points, which would drop the Fed’s benchmark rate to a range of 5% to 5.25%.

The Fed doesn’t set the interest rates consumers are most familiar with, such as those for homes and cars. But the Fed's actions do influence all other borrowing rates.

Freddie Mac shows the average 30-year fixed-rate mortgage is now 7.03%, a level not seen in 20 years before the Fed started raising its benchmark rate in 2022 as a lever to tame consumer price inflation.

“I think an interest rate decrease is probably still more likely than an increase, but I'm not counting either one of them out,” Weiler said.

The Commerce Department on Thursday released an update to its gross domestic product figures, which are a broad measure of the U.S. economy.

The GDP was revised downward for the first quarter to an annual rate of 1.3%, from 1.6% in the department’s initial estimate.

The slower growth than originally reported primarily reflected a downward revision to consumer spending, the department said.

This comes off hot economic growth in the second half of last year, with GDP up 4.9% in the third quarter of 2023 and up 3.4% in the fourth quarter.

Weiler said the sweet spot for GDP would be between 2 and 3% growth. But the slower growth isn’t bad as a “signal to the policymakers” who are looking for reasons to cut interest rates.

We want growth, but we don’t want growth that fuels inflation, he said.

There’s “no real turbulence” in the economy, Weiler said. And the Fed wants to see a longer trend of slower growth and inflation before taking action.

Friday, the Commerce Department released the April update for its preferred measure of inflation, the personal consumption expenditures price index.

The PCE reflects what people are actually buying, unlike the popular consumer price index, which is calculated off a set basket of goods.

When prices are going up, people shift away from more expensive goods as opposed to sticking with the same stuff, Weiler said. That makes the PCE a better real-world reflection.

And so-called core PCE, which strips away volatile food and energy costs, is even better in the Fed’s eyes.

Weiler called core PCE the Fed’s “gold standard.”

Core PCE rose 0.2% from March to April, the lowest month-to-month increase of the year.

Core PCE was up 2.8% on an annual basis.

And the overall PCE was up 2.7% on an annual basis.

The CPI, for comparison, was up 3.4% on an annual basis.

Though small, Weiler said the PCE was “shaving its growth,” and that’s “a good sign.”

The Fed will want to continue to see that kind of deceleration of inflation.

“The data shows no signs of mission accomplished,” Papadimitriou warned.

He said WalletHub, a personal finance company, has an upcoming report that shows credit card debt went down nationally by $51 billion in the first quarter, with an 11% higher paydown than the year before.

That’s a sure sign Americans are pulling back their spending under the weight of higher prices, he said.

Core PCE, for example, might be up 2.8% compared to last year, which isn’t way above the Fed’s target of 2% annual inflation. But Americans are still feeling the cumulative effect of inflation over the last several years.

Core PCE is up 18% in the last five years.

“Unfortunately, I think we are going to be in the middle ground where the Fed did its part, and the consumers will have to do their part for inflation to come eventually down,” Papadimitriou said. “And I think we're seeing the early signs of that starting to happen.”

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